Our relationship to fiat currency has now spanned many decades, creating attitudes and habits which one might collectively call a “culture of addiction.” This culture has gradually and surreptitiously blinded us to the realities we are facing; therefore, it is perhaps best to illustrate the subject using an area that our society still recognizes as a patently unhealthy form of dependence – drug addiction. The analogy proves to be rife with parallels that indicate how very far we have fallen from the understanding of our Founders.
Several years ago, a film called Trainspotting depicted the lives of heroin-addicted youths living in squalor in a depressed area of Scotland. Setting aside the film’s other shortcomings (which are arguably considerable), the movie provides a remarkably astute depiction of the psychology of addiction. At first, the drug is sought as a source of pleasure, an elixir to transform life’s sea of troubles into a sparkling rivulet. Although the addicts are in fact living in dilapidated circumstances and are rapidly losing all prospects for the future, the drug is sought as a “fix” to these problems, a magic wand that induces a fantastical condition of unimaginable ease. With reality concealed behind a screen of artificial wellbeing, the addicts are unaware that the real conditions around them are steadily deteriorating. One day, they awake from the daze to discover that the infant daughter of one of the addicts has died, her cries unheard while they slumbered in the dreams of the entranced. When reality thus rears its ugly head, instead of facing an increasingly overwhelming situation, it is time for another “fix.” Instead of taking the drug for pure pleasure, the addicts now seek the Lethe-like liquor to banish their thoughts of the downward spiral engendered by the habit itself, thus suppressing their awareness of the consequences incurred “while you were sleeping.” This self-destructive cycle is the epitome of addiction, which is defined as “any substance use or reinforcing behavior that has an appetitive nature, has a compulsive and repetitive quality, is self-destructive, and is experienced as difficult to modify or stop” (Orford, 1985).
The reference to “reinforcing behavior” suggests how such a cycle can arise within the life of whole cultures. The relationship between the addicts described above and fiat currency might appear to be a staggering leap, but in fact it is too close for comfort. Americans appear to live in a world of prosperity – our immediate environment seems to be brimming to the full with products, appliances, home furnishings, and luxury goods. To our eyes, we see a superabundance of slick automobiles, high-tech computers, “smart” phones, and other extravagant contraptions that all seem to say back to us, “it is well.” If anything, our world appears too glutted; as the cultural critics tell us, materialism is on the rise because we are encircled by an enchanted ring of shining commodities.* It seems unimaginable that our prosperous surroundings might tumble to the floor like a theatrical backdrop at the close of a play. But we have been moving steadily closer to this reality, all acting our parts in the desperate hope that the show will go on forever.
It should have been taken as a significant warning sign when the vast majority of the props for our drama became marked with the label “made in China.” The cheap, imported goods of slave labor have helped to conceal our economic condition. It should be equally disturbing that, although we own gadgets and gizmos galore, we often do not own the very homes in which we live – even with two parents working full time, the mortgages take decades to pay off, and they are increasingly defaulted. Thus the ownership of our most significant purchase is largely an illusion; put in feudal terms, we are tenants. Where our grandparents could truly own a house and a car, with food on the table and leisure time for a “Sunday drive,” all on a single father’s salary, today both parents work longer hours, max out credit cards, borrow and mortgage and refinance until our heads spin. Merely calculating what we owe often requires a hired “debt specialist.” The revolution occasioned by the internet and technological advancements should have produced an increase in productivity that catapulted our economy forward. Instead, it only helped us to keep up the pace on our financial gerbil wheel and to mask the actual conditions in which we are living. Like those faltering aristocratic families of old, we still appear to be living the high life according to outward signs, but the real wealth has been eroded within. It is only a matter of time until appearances catch up with reality.
However, the “fixes” to which we are addicted are not primarily our credit cards and mortgages. It is understandable (if unwise) for individuals to intuit that their labor ought to be producing substantial fruits, and to turn to loans in order to obtain the lifestyle they have “earned.” The national addiction is a larger phenomenon, relating to the choices of policymakers. When we unhinged our currency from its stable anchoring in gold, we gave politicians the ability to win votes by making promises which they couldn’t pay for through taxes alone; these costs could only be defrayed by printing reams and reams of paper money, essentially creating a welfare system based on debt. As a result, each dollar lost something of its value through every subsequent generation. This is a slow and steady form of property confiscation, which is especially threatening to the middle class. We are saving and bequeathing in depreciating funds; our dollars melt in our hands. When money is created faster than goods and services (whose value it is supposed to represent), prices are driven upwards. This is a fundamental economic axiom – such laws function whether we desire to believe in them or not. The man who refuses to believe in gravity and jumps off a bridge can cry out “so far so good” while he falls through the air, but in the end, the reality of the earth’s laws will be painfully evinced.
The corrosive effects of “acceptable” inflation have been hidden from us by manipulative Consumer Price Indexes (CPIs), which keep changing their starting dates or selectively omit areas of consumption in order to paint a deceptively rosy picture. For example, the most recent CPI had the official inflation rate at 3%, but the calculation excluded food and energy – both of which are central to economic life. When these two areas are factored in, the current rate is closer to 15%, or five times higher. When the President of the NY FED spoke to a crowd in Long Island recently, he reported the “good news” that today you can buy an iPad2 that “costs the same as an iPad 1 that is twice as powerful.” But food prices have been rising since 2009, and he happened to be speaking to a crowd that watched their grocery bills – one person asked “When was the last time, sir, that you went grocery shopping?” Another exclaimed, “I can’t eat an iPad.” The modern financial system permits a great deal of confusion and smoke-and-mirrors to manipulate the press and public opinion. The debasement of statistics has accompanied the debasement of the dollar. But some realities are simply too self-evident to be hidden from common sense. “The rich man is wise in his own eyes, but the poor who has understanding sees through him” (Proverbs 28:11).
All unbacked currencies are mortal, and ours has been showing very poor vital signs. Historically, this process is perennial, which is one reason why the truth it reflects ought to be considered an axiomatic principle. Consider the fate of the British half-penny, which was originally produced with real silver in the medieval period. It had a Christian cross on the front, and the penny was extremely valuable, so much so that it was frequently broken in half along the lines of the cross in order to facilitate purchases. When they started minting actual “halfpennies” in the 13th century, these were also made out of silver. But over time, the coin was made a little smaller, with a little less purity, then with a little copper, then with more copper than silver. By the 1800s, copper had fully squeezed out silver. In 1984, the halfpenny was discontinued, having lost all value. The same fate awaits paper money when it loses its anchoring in bullion – in 1924, the German paper mark was changed over, with 1 trillion marks exchanged for 1 new reichsmark. In 1946 in Hungary, it was 400 quintillion pengoe for one new forint. In 1985 in Argentina, it was 1,000 peso argentinos to one austral, which was again subdivided into 100 centavos in 1991. In Russia, the Leninists had tried to eliminate currency altogether (one of Marx’s goals), but at the point of utter financial ruin, they adopted a gold standard in the 1920s, and the economy improved under the gold-backed chervonet. However, the lesson was soon forgotten; as Judy Shelton documented, by the time of Gorbachev billions of unbacked rubles were being printed, which precipitated the collapse of the Soviet empire. At the time of collapse, few people understood the true extent of the crisis in Soviet Russia due to “skillful discrepancies and omissions that disguise[d] the true condition of the internal budget” (Shelton, 1989). Does this sound familiar? The list could go on; entire charts are devoted to the mortalities of currencies once they begin to lose their mooring in bullion.
We are no exception to this trend – in terms of the constant dollar, with a true CPI applied, the dollar is now estimated at a pitiful three pennies of its 1940 value. (Hence the luxury and illusion offered by the nominal dollar, which is preferred to the harsh realism of a constant dollar.) By some estimates, the dollar, once the glory of the globe at the end of WWII, had lost 86% of its official purchasing power by the beginning of 1985. This degenerating trend is also readily visible in the history of coins; in the 1930s, the copper penny could purchase hard candy, and silver coins had real purchasing power -- at least until silver coinage ended in 1964. Today, it is difficult to find goods to buy with our coins. However, the older coins minted with real silver still have purchasing power: in 2008, a dime from the 1930s still contained $1.42 worth of silver, the quarter was worth $3.55, and the half-dollar contained $7.10 of silver. Even the humble penny of yore contained two and a half times its face value in copper. (These numbers would be roughly three times higher today, as the price of silver has continued to increase.)
We have the most sophisticated mechanisms with which to paint over our reality, which will eventually shatter despite all of the tranquilizing words of public relations experts, no matter how often they are repeated throughout the press. We might be addicted to infusions of new currency, but we are equally dependent upon the subtleties of high finance to confuse our way to delusive victory. But every new asset bubble is waiting to burst; every “toxic asset” will eventually seep through the cracks and poison its surroundings. These truths make our recent haggling over the debt reduction appear like rearranging desk chairs on the Titanic.
Our Founders understood that the printing of unbacked currency was a “passion” which could grip the appetitive masses. They had seen the economic patterns described above in microcosmic form within the several states under the Articles of Confederation. The series of paper money crises typically originated when debtors struggling to make loan payments pushed their state legislatures to create an unbacked paper money. The creditors, whose contracts specified payments in gold, silver or barter items, naturally rejected a valueless currency. As a result, the debtors pushed further for odious “stay laws,” which postponed or even cancelled debts. Next came the imposition of “tender laws” and “ex post facto laws,” which forcibly compelled creditors to accept the fiat currency, regardless of what their contracts had specified. The most egregious example was Rhode Island, where the legislature was dominated by indebted farmers who first circulated paper money, then made its acceptance mandatory, and finally allowed debtors to discharge debt by depositing some amount of money in a court and posting an advertisement in the newspaper to that effect. An exodus of creditors from the state of Rhode Island ensued. Horrified by the direction in which the state was tending, the Rhode Island supreme court declared the paper-money law unconstitutional; in response, the legislature threw the court out of office and replaced the justices with more accommodating individuals.
This was not the freedom of “self-government”; it was expropriation of property en masse. Without the sophisticated jargon and confusing complexities of contemporary economics, the state’s shenanigans were plain for everyone to see. Hence the expression of genuine concern in Federalist #10 about a “rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project.” In fact, the thinking behind the Constitution was in large part prompted by the disastrous experience of fiat currencies. So frightening was the specter of unbacked paper money that one Convention delegate said that granting the federal government the power to issue it “would be as alarming as the mark of the Beast in Revelation.” The experience of fiat currencies rendered the prospect of a Constitutional Union more inviting -- as an escape from irresponsible fiscal policy. As the Federal Farmer, one of the Anti-Federalists, observed: “Our governments have been new and unsettled; and several legislatures, by making tender, suspension, and paper money laws, have given just cause of uneasiness to creditors... The conduct of several legislatures, touching paper money, and tender laws, has prepared many honest men for changes in government, which otherwise they would not have thought of....”**
The Federal Farmer was correct, for Article I, Section X of the Constitution specified that no state could “emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts.” Our Founders might have lacked the highfalutin lingo of modern specialists, but they understood the fiscal responsibility imposed by currencies backed by bullion. We need this kind of responsibility desperately today, more than we need all the sophisticated theories in all the economics books that have ever been printed – many of which were proven wrong by the very history our Founders witnessed. After seeing the results of the States’ experiments in unbacked currencies, our Founders sought to prevent the patently irresponsible behavior that has now resulted in a debt that has no ceiling and an oncoming collapse which will seem to have no end.
Our cultural habituation to the presence of fiat currency has inured us to the dangers posed by these unbacked notes of promise. If we want to wake up from this decades-long dream, we need people with the moral fiber required to face our present reality. They will need to look at the status of the dollar in constant terms, recognize our true economic condition, and work to shift us efficiently and swiftly onto banknotes convertible to gold. The effects will be manifold – firstly, this change will greatly help the status of the dollar around the world. Following this monetary realignment with gold, an era during which a slow process of savings and capital rebuilding should ensue, which will lead us to a true economic recovery, rather than the sham “recoveries” announced in the media every few months. Regaining our solvency will require hard work, moral courage and steadfastness. It will be tempting to reach for another “fix” during the period of withdrawal. Furthermore, as Franz Pick observed years ago, after “decades of maltreatment of the nation’s money, the vested interests of inflation have become too powerful and too influential. They have absolutely no desire to see their financial empires and attendant political privileges dismantled by such an obscene thing as a monetary unit, stable in purchasing power as well as in foreign exchange value” (1986). After the banking elite has been deprived of its mechanisms for currency manipulation, as a people we must not behave like the debtor farmers, but willingly submit to the fiscal responsibility imposed by convertibility to gold.
Unless we seek within our breasts to find men and women capable of this challenge, we might be doomed to relearn these lessons through history, and she is an utterly merciless teacher. We have been violating economic laws as inexorable as gravity for decades now, and it is nearing the time when we shall witness the consequences. The curtain is about to drop, but no deus ex machina is going to swoop in at the last moment to save us from our tragedy. We are compelled to save ourselves. If we fail in this effort, our negligence is tantamount to that of the lamentable addicts with which this post began, and our children will suffer -- they will breathe their first breaths and last gasps in poverty -- because of our collective delinquency.
* By “cultural critics,” I refer to writers like Walter Benjamin (especially his Arcades Project) or virtually anyone from the neo-Marxist camp. In fact, I believe that materialism has theological and philosophical roots. Although capitalism provides a form of expression for the elevation of the material plane over spiritual life and philosophical truths, it does not in fact create that hierarchy of values. The excessive consumerism witnessed today belies much deeper, more foundational issues.
** This Anti-Federalist was speaking out of concern that the states were tarnishing the name of democracy with their poor management of currency, and thereby preparing the way for the Federalists.